 "A photo of RBI headquarters in Mumbai (pic: Kamlesh Pednekar)")
The Reserve Bank of India Annual Report offers some interesting data, which indicates credit disbursal patterns and more broadly, points to the sources of corporate funding. Overall, non-food credit offtake was pretty low in 2015-16, a continuation of the slow trends of the 2014-15 financial year.
Non-food credit growth dropped to single digits in 2014-15 hitting 8.6 per cent and it stayed in single digits in 2015-16, with a marginal improvement to 9.1 per cent. In 2016-17, (April-June) non-food credit growth is at 10.4 per cent if the data is adjusted to account for Uday bonds and the advent of two new banks.
So far in 2016-17, infrastructure has seen 2.1 per cent shrinkage in bank credit, with power sector credit down by 7.7 per cent. As always the private sector has done better, with private sector banks registering overall credit growth at around 24 per cent. For both private banks and for the public sector, personal consumption was the big area. Personal loans including housing loans showed the best growth rates.
Bank credit remained expensive as banks did not transmit the policy rate cuts adequately. However, businesses found alternate sources of financing to compensate to some extent. Many commercial borrowers tapped the corporate bond market. The effective borrowing costs for a company, which can access the bond market, are quite a lot lower than the prime borrowing rate.
In addition, yields did fall in both G-Security and the corporate bond markets. For blue-chip concerns at least, it was possible to raise money substantially cheaper by issuing bonds. Non-convertible debenture issues increased by 262 per cent on a year-on-year basis, garnering Rs 34,100 crore for businesses.
The primary market also improved with more initial public offerings (IPOs) launched. There were 73 IPOs raising about Rs 14,300 crore in 2015-16. That's not great but it does signify a revival. The sentiment continued to look strong in 2016-17, with IPOs raising Rs 7,500 crore during April-July 2016, compared with Rs 2,900 crore during the corresponding period of the previous year.
The same trends could persist through the next quarter at least. Bank lending is unlikely to recover substantially until there is large scale recapitalisation of public-sector banks. However, bond yields are showing signs of travelling even lower, which implies that the corporate bond market could be attractive. Sentiment seems quite strong so the IPO market will continue to buzz.
That being said, credit demand is still not very strong. The capital goods segment is not showing great activity and the Index of Industrial Production (IIP) has seen marginal growth of 0.6 per cent during April-June 2016 over the corresponding period of 2015.
However, part of the problem for the IIP lies in the collapse of a specific segment. Insulated rubber cables suffered declines of 86 per cent / month which pulled down the entire index despite this item having a small weight. Adjusted for that single item, the IIP would have risen by 3.5 per cent year-on-year across April-June 2016. However, even the adjusted figures indicate moderate expansion, at best.
RBI doesn't estimate a dramatic pick-up in activity. It sees gradual expansion, based on improvements in various factors. One plus is a good monsoon (which is now a given), a second assumption is moderate inflation (this may not in fact, be guaranteed), a third assumption is a revival in exports (this depends on global trade conditions improving, etc).
Under the circumstances, valuations at the 24 PE levels are daunting. The one-year return from such high valuations are usually negative. In theory, we would need a huge expansion in corporate activity, and earnings growth at around 25 per cent, to justify such PE valuations. That sort of acceleration is not visible, which implies that investors should look to book some profits if the market travels much higher.
The author is a technical and equity analyst
